Question

A firm is considering the purchase of a new machine to increase the output of an existing production process. If each of these machines provides the same service over their useful lives and the MARR is 18%.

	Machine A	Machine B
Investment cost	$100,000	$55,000
Net annual revenues	$22,675	$17,879
Market value at end of useful life	$25,000	$12,000
Useful life	10 years	5 years
IRR	19.7%	22.5%

Which of the two machines, if any, do you recommend by using:

1. PW method.
2. IRR method.
3. Coterminated assumption with a study period of 7 years.

Answer 1

o MARR: 187 PW Method 2 1.18 for Machine Aigl (cotermination period 7 7 years) NOV_ -1,00,000 + 22675 assumption + 22675 + 22675 + 226.75 + (1.18) 11-18) (1.13) 22675 + 22675 + (22675 + 25000) (1.1876 (1.18)? 1.18)10 -100,000 + 19216.1 22675 + 22 675 + 22675 1,3924 1.643 22675 + 2267 +22675 I 47675 + 25000 2.7 3.185 4777.37 (1.1895 1,938 2,287 -) -1,00,000+ 19216.1 + 16,312.+ 13,826.2 + 11900, 2 7119.304 + 9945.17 + 8398.1 + $965 + 4777.374 5275 56372 $632.13 $32 +3704065 with a for Machine B. useful life of 5 years, MIN :_-55,000 + 17,879 + 17,879 + 17,879 + 12,879 (1.18) (1.18)2 11.18) (1.1874 +(12,879 + vood) to + 0 11.18,5 -55000 + 15151.6 + 12862.58 + 10,881,9+9225.490 + 13064.71 56176186, 28 ROUGH

g would recommand with respect to PW method Machine as it has a positive NPV valio when coterminated assumption is 7 years.

IRR Method 10 10 yrs Machine has useful useful life years but are using using it for 7 7 years for IRR is 19.7%. but if We will it. for yrs which is lem than its its IRR useful life so fall. it 7 11 ليبيا Machine B has IRR A 22.5%. so, by 9RR method we will recommend Machine B as its IRR . is MARR ie. 22.5). >18%. more than